Italy pivotal in Lehman's bid to conquer Europe

Bonds, securitization and advisory services seen as key areas of focus

By

SimonKennedy

LONDON (MarketWatch) -- Italy is set to become pivotal in Lehman Brothers' bid to grab market share in Europe, where growth opportunities for the U.S. powerhouse could outstrip those in its domestic market, analysts believe.

Lehman Brothers
LEH
which has previously had considerable success in the country, appointed Giovanni Marolda earlier this year as co-head of fixed income for Italy, alongside Andrea Potsios, the existing head.

Its has also hired Francesco Caio, the former chief executive of Cable & Wireless, as vice-chairman of European operations, with the intention of driving further expansion in Italy and continental Europe, according to a recent report in The Times (of London) newspaper.

Caio, who announced his resignation in January after less than three years at the helm of C&W, rose to prominence in the early 1990s as the first CEO of Omnitel, Italy's second-largest mobile company.

'Lehman Brothers are increasing their presence in Europe as rapidly as they can...'
Richard Bove, Punk, Ziegel &amp; Co.

The charismatic Caio also founded European Internet service provider and business-telecoms company Netscalibur.

"Lehman Brothers are increasing their presence in Europe as rapidly as they can because they believe there is a structural change in the market," said Richard Bove, an analyst at Punk, Ziegel & Co. in Tampa, Fla.

Lehman's net revenue from European operations rose 71% in 2005, with its non-U.S. revenue of $5.4 billion representing 37% of the group's total revenue.

Bove cited the long-term growth of European bond markets as a key driver. Europe's bond markets are gradually expanding at the expense of the syndicated loan industry as the cost of obtaining finance through a bond issue falls.

The development of European bond markets is many years behind the U.S., but, as a fixed-income specialist, Lehman Brothers is keen to take further advantage, he noted.

One specific market Lehman will focus on in Italy is the mortgage securitization business, said Meredith Whitney, an analyst at CIBC World Markets. Securitization is the process of pooling a large number of assets, such as mortgages, and selling them, often in the form of an easily traded bond.

Only around 11% of European mortgages are securitized, compared to around 60% in the U.S., where the market is much more mature, she noted.

Data from the Bond Market Association showed a 23% rise in Italian securitized issuances in the first quarter to around 3 billion euros, but this is dwarfed by the more than 40 billion euros issued in the U.K.

Lehman has done its fair share of this business, but sees a lot more opportunity, with Germany another market that looks promising for mortgage securitization said Whitney. See more global markets coverage.

"Italy has a very high home-ownership rate, but with basically no mortgage market," said Whitney. "They've just scratched the surface."

A history of strength

Italy features on the Lehman radar because of the firm's historical strength there, said a former Lehman staffer, who did not want to be named.

Lehman's relationship with Italy dates back to the late 1970s, when Banca Commerciale Italiana made a significant investment in the firm.

Lehman was particularly strong in the technology, telecommunications and infrastructure sectors, and more recently in the media sector when media mogul Silvio Berlusconi was the country's prime minister, said the former staffer. Berlusconi was ousted from the leadership in May by Romano Prodi.

Lehman's recent deals in the country include acting as sole adviser to De Agostini, majority owner of Lottomatica, on the Italian lottery operator's 4 billion-euro agreement to buy GTech Holdings
GTK, -2.41%
of West Greenwich, R.I. See archived story.

"In the 90s, Italy was hot, especially in the tech and telecoms sectors," agreed CIBC World Markets' Whitney.

The hiring of former Cable & Wireless head Caio suggests the firm wants to further bolster its strength in these core markets.

A spokeswoman for Lehman Brothers declined to comment on Caio's hire or the firm's plans for Italy.

Lehman has also recently strengthened its ties with France, having hired Felix Rohatyn, one of the most influential bankers of the last half of the 20th century and the former U.S. ambassador to France, as a senior adviser. See archived story.

M&A's powerful potential

The telecommunications sector, along with technology and manufacturing, could also be a key focus because of likely growth in advisory revenue, said Bove.

A booming manufacturing industry in Asia is putting pressure on many European firms, resulting in excess manufacturing capacity. Lehman believes this pressure will lead to even more mergers and consolidation in these sectors, creating a lot of opportunities for its advisory team, Bove added.

Bear Stearns
BSC, +0.00%
is another U.S. house that has targeted Italy as a gateway into continental Europe, having built up its presence in the country in the last couple of years, Bove said.

Italy has also come under the spotlight recently over mergers and acquisitions activity in its financial sector.

The planned merger between Banca Intesa and Sanpaolo IMI is the first in what could turn into a slew of banking mergers in a country that boasts hundreds of small local banks. See archived story.

Burgeoning consolidation in the sector follows the resignation late last year of Antonio Fazio, the country's top central banker. See archived story.

Prosecutors are investigating whether Fazio, who had the power to veto banking mergers, improperly backed Banca Popolare Italiana (006430) in its effort to acquire local lender Banca Antonveneta when Antonveneta received a bid from Holland's ABN Amro
ABN, +0.00%
(30110).

The new head central banker, Mario Draghi, has often said he wouldn't take sides if a foreign bank wanted to buy an Italian rival or expand in the country.

Private-equity deals have also been on the increase across Europe. And Lehman earlier this year appointed Vittorio Pignatti Morano to the newly created position of head of European private equity.

Pignatti, who will be responsible for launching several European private-equity funds, was a key player in the creation of Lehman Brothers' franchise in Italy.

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